S&P Global Ratings affirms IOI Corp credit rating

The agency revised Bunge's outlook from stable to negative after it opened a $900 million credit facility to help fund a deal for a controlling stake in Malaysian palm oil producer IOI Loders Croklaan. Moody's maintained Bunge's Baa2 long-term debt rating, but warned that without improved operating performance and cash flow, the company risks a downgrade to Baa3, one notch above junk.

UALA LUMPUR: S&P Global Ratings affirmed its 'BBB-' long-term corporate credit rating on IOI Corp. Bhd. The outlook is stable. 

The ratings agency said on Friday it also affirmed its 'BBB-' long-term issue rating on IOI Corp's guaranteed senior unsecured debt. 

“We affirmed the ratings because we believe that more volatile earnings will temper the benefits of the debt reduction following IOI's proposed asset disposal,” it said. 

On Sept 12, 2017, IOI announced that it had entered into an agreement to sell a 70% stake in specialty oil and fats company Loders Croklaan to Bermuda-based Bunge Ltd. for RM3.94bil (€297mil and US$595mil in cash).

“In our view, the disposal will impair IOI's earnings quality. We estimate that the company's resource-based manufacturing revenues will shrink by about 40% (approximately RM6bil) and Ebitda (earnings before interest, tax, depreciation and amortisation) by about 20% (approximately RM400mil) following the sale,” it said. 

S&P said IOI's operating profits would likely be more volatile from higher exposure to fluctuations in crude palm oil (CPO) prices. 

“We understand that IOI intends to be a partner to Bunge post the transaction. Barring any unforeseen circumstances, we do not expect IOI's feedstock sales to Loders to be affected, given the supply contract between them to be executed,” it said.

The ratings agency said despite the sale, it believes that IOI will remain vertically integrated. It 
estimates that the company's operating profit contribution from the downstream division would shrink to about 25% from around 30% before the transaction. 

It expects IOI's Ebitda margin after the transaction to rise to about 22% from about 14% currently because the plantation business has higher margin (above 50% EBIT margin on a stand-alone basis). 

“Additionally, we believe the company will embark on bolt-on acquisitions both in the upstream and downstream segments that will bolster earnings. That could help IOI regain some of its lost size and scale over time.

“We expect the transaction to help improve IOI's financial position to some extent. The company intends to use half of the cash proceeds to reduce debt, and the management and the shareholders envisage operating at a lower financial leverage after the transaction closes,” it said. 

S&P estimates IOI's pro forma leverage will reduce to around 2.4 times with the ratio of funds from operations (FFO) to debt improving to around 27%. The transaction is to close in the second half of 2018, although it could be earlier subject to regulatory and other customary approvals.

Commenting on the stable outlook, S&P said this reflected its view of potentially more volatile earnings amid a significantly reduced debt load for IOI. 

“We expect that the company will be able to maintain its FFO-to-debt ratio at around 25% over the next 12 to 24 months.

“We could lower the ratings if IOI's financial strength deteriorates, such that the FFO-to-debt ratio approaches 20% for a prolonged period. This would most likely occur if the company aggressively pursues capital outlays (via large acquisitions or shareholder payments) or due to a lasting period of low CPO prices.

“We could consider an upgrade if IOI's financial strength improves permanently, with the FFO-to-debt ratio remaining above 35%, and management remains committed to maintaining conservative financial policies. The improvement in financial ratios could occur if IOI controls capital outflows and reduces debt,” said S&P.

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